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Abstract
It is often asserted that stock splits and stock dividends are purely cosmetic events.
However, many studies have documented several stock market effects associated with
stock splits and stock dividends. This paper examines the effects of these two types
of events for the Danish stock market. Consistent with the existing literature, the
two events are associated with a significantly positive announcement effect of ap-
proximately 2.5%. However, when examining the two events more carefully, several
important results are obtained. First, a firm's motivation for announcing the two
events is completely different. Second, the positive stock market reaction is closely
related to associated changes in a firm's payout policy, but the relationship varies for
the two types of events. Finally, there is only very weak evidence for a change in the
liquidity of the stock. On the whole, after controlling for the firm's payout policy,
the results suggest that a stock split is a cosmetic event and that a stock dividend
on its own is considered negative news.
Key words: Stock splits; Stock dividends; Cash dividends; Signaling; Liquidity

New accounting standards require ¯rms to expense the costs of option-based compensation (OBC), but the associated valuations o®er many challenges for ¯rms. Earlier research has documented that ¯rms in the U.S. generally underreport the values of OBC by manipulating the inputs used for valuation purposes. This paper examines the values of OBC disclosed by Danish ¯rms. The results suggest that ¯rms experi ence some di±culties in valuing OBC, but interestingly, there is no clear evidence of deliberate underreporting. For example, there is no evidence that ¯rms use manipulated values for the Black-Scholes parameters in their valuations. Furthermore, ¯rms determine the expected time to maturity in a way that is generally consistent with the guidelines provided by the new accounting standards. The ¯ndings di®er from those of the U.S., but is consistent with the more limited use of OBC and the lower level of attention paid to these values in Denmark. However, the di®erences can also be due to the fact that several Danish ¯rms do not provide the information required regarding their OBC, which is clearly a very e®ective way of hiding the true values.

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We derive an explicit solution to the portfolio problem of a power utility investor
with preferences for wealth at a ¯nite investment horizon. The investor can invest
in assets with return dynamics described as part of a general multivariate model.
The modeling framework encompasses discrete-time VAR-models where some of
the state-variables (e.g. expected excess returns) may not be directly observable.
A realistic multivariate model is estimated and applied to analyze the portfolio
implications of investment horizon and return predictability when real interest rates
and expected excess returns on stock and bonds are not directly observed but must
be estimated as part of the problem faced by the investor. The solution exhibits
small variability in portfolio allocations over time compared to the case when excess
returns are assumed observable.
JEL Classification: G11
Keywords: Portfolio choice, predictability, VAR, unobserved state-variables, hedging demands

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Rational expectations models make stringent assumptions on the agent's
knowledge about the true model. This paper introduces a model in which the
rational agent realizes that using a given model involves approximation errors,
and adjusts behavior accordingly. If the researcher accounts for this empirical
rationality on part of the agent, the resulting empirical model assigns
likelihood to the data actually observed, unlike in the unmodified rational expectations
case. A Lucas (1978)-type asset pricing model which incorporates
empirical rationality is constructed and estimated using U.S. stock data. The
equilibrium asset pricing function is seriously affected by the existence of approximation
errors and the descriptive properties and normative implications
of the model are significantly improved. This suggests that investors do not
| and should not | ignore approximation errors.
Keywords: Approximation errors, model uncertainty, estimation of structural
models, rational expectations, asset pricing.

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It is a delicate matter to trade spot products and financial derivatives in energy markets. Op-
posite to bond and stock markets, the underlying assets are real products and a significant part
of the demand for them represents a real need for the products, which can only be substituted
away with some difficulties or, in some cases, only in a prohibitively costly manner. This is
particularly true in the spot market, where the demand is almost always met, but where the
spot price processes can be quite different from the spot price processes conventionally used in
the pricing of derivatives. This pattern of real demand is also the main reason for the existence
of the well-known convenience yield in energy markets.

In 1992 the Cadbury Committee report on the financial aspects of corporate governance was
published. The Committee had been established following the failures of a number of high
profile businesses in the UK which had shaken confidence in the market. Some nine years
later, in 2001, the collapse of Enron sent shockwaves through the US market. As a result of the
Enron collapse and various other high profile scandals in the years since its occurrence, the US
is examining its own corporate governance structures and provisions to determine how these
might be improved and help avoid another Enron. The EU similarly is developing principles
and legislation to improve corporate governance, and scandals such as Royal Ahold and
Parmalat have helped drive further governance reforms.
In this paper we detail the development of corporate governance codes in the UK and the
adaptation of similar codes in the EU. We discuss the role of the financial sector in corporate
governance and how principles for regulation and supervision of the financial sector
complement codes of conduct and legislation in the area of corporate governance.
JEL Classification numbers: G34, G28, G22, G23
Keywords: corporate governance, financial sector; institutional investors.

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The article analyses how government spending is determined under different
exchange rate regimes in the context of a small open economy. Assuming
nominal wage contracts which last for one period and assuming a benevolent
government which determines government spending to optimise a representative
individual’s utility, it is demonstrated that there are differences between
exchange rate regimes with respect to the level of government spending. These
differences arise first because a rise in government spending affects macroeconomic
variables differently under different exchange rate regimes, and second
because the government’s inclination to expand government spending is affected
by inflation which depends on the exchange rate regime. At low rates of inflation,
the government is inclined to set a higher level of government spending under a
fixed exchange rate regime than under a floating exchange rate regime in which
the monetary authority optimises preferences which include an employment target
and an inflation target. As government spending affects the representative
individual’s utility, the choice of exchange rate regime has an impact on welfare.
Keywords: exchange rate regimes; fiscal policy; monetary union; inflation
targeting.
JEL classicification: E42, E61, E62, F33.

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Kinks and jumps in the payoff function of option contracts prevent an effective
implementation of higher-order numerical approximation methods. Moreover, the
derivatives (the greeks) are not easily determined around such singularities, even with
standard lower-order methods. This paper suggests a transformation to turn the original
ill-conditioned pricing problem into a well-behaved numerical problem. For a
standard test case, both vanilla- and binary call price functions are approximated with
(tensor) B-splines of up to 10’th order. Polynomial convergence rates of orders up to
approximately 10 are obtained for prices as well as for first and second order derivatives
(delta and gamma). Unlike similar studies, numerical approximation errors are
measured both as weighted averages and in the supnorm over a state space including
time-to-maturities down to a split second.
KEYWORDS: Numerical option pricing, Transformed state spaces, Higher-order
B-splines.

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Housing markets in several countries are suffering. The prolonged and strong housing price rises of recent years have turned around. Historical records suggest that housing price drops may happen slowly but be large. Housing prices continue to fall because capital losses have substituted capital gains, housing equities are falling, and housing price expectations have become negative. Household debt had increased to the same degree as housing prices or even more in some countries. Access to mortgage and credit had improved and lenders used "cruise control” when financing still higher housing market prices. Now, housing demand is further weakened because access to credit has been tightened. During a downturn, owner-occupiers’ housing price risk is increased and a growing number of owners have negative equity and payment troubles. Under these conditions, arrears and foreclosures will be widespread in owner-occupation. The effects on the wider economy of a housing price downturn are discussed. Not only does the lenders’ increased credit risk lead to tightened credit access, losses threaten the banks and can create financial crises. Falling housing prices clearly depress the housing market and housing construction activities and thereby the contribution of residential investments to economic growth, while it is less obvious that average housing consumption and residential investments over the whole cycle are affected. The reduction of non-housing consumption as a result of a wealth effect is a reality for years for depressed owner-occupiers but in the aggregate, the housing wealth effect is more dubious.

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Abstract.
In Denmark, taxation of residential property returns varies considerably with the type of ownership and type of tenure in terms of the way income is calculated, the types of taxes applied and tax rates, which range from 0 % to above 60 %. Together with other housing subsidies this disparity in taxation contributes to the pronounced lack of tenure neutrality in the Danish housing market.
The paper illustrates how tax rules alone create distortions and imbalances in the housing and
residential property markets and discusses as well the magnitude of the imbalances. The method
used is the application of a set of return and user cost equations.
The tax aspects of the long-standing rather unequal treatment of private rental dwellings, social
rental dwellings, owner-occupied dwellings and private co-operative dwellings, which have drawn
decisive tracks in the markets, are discussed.
The lowering of the tax rate for the return of institutional pension savings to 15 % which came into effect in 2001 has created a substantial advantage for pension funds compared with private
investors with regard to investments in rental residential properties. The owner-occupiers’ user
costs and subsidization are shown to depend on their capital structure and to a large extent they
depend on whether the owners’ most obvious savings alternatives are either personal investments
with heavily taxed returns or institutional pension savings with lightly taxed returns.
Also private co-operative associations are tax exempted, and this fact in combination with the
prospects of improved legal conditions for raising loans to finance the individual apartments will
almost certainly lead to this form of tenure – as "tax free ownership" – capturing part of the
market for owner occupation.